How to Manage Debt

As you learn how to manage debt, just know that it can actually be your friend. Debt can suddenly make a laptop, phone, or car affordable. It can also help you through an emergency situation, like when you need to pay for an urgent dental procedure. You can even turn debt into free money through rewards programs like cash back or discounted airfare. If you’re really responsible about paying back your creditors, your credit score goes up, and you can eventually buy a home. That’s a huge deal because it allows you to build equity, and in turn, wealth. But if you don’t know how to manage debt, it can hurt your credit score, lead to higher interest rates, and cost way more money to pay off your debt over time. It can also make it tougher to get loans down the road. The loans you do get could be more expensive. And you might have a hard time buying a home and building equity.

Whether it’s through a spreadsheet or a personal finance app, make a master list of everything you owe. That list should get really specific about who you owe the money to, the interest rate, and of course, when the payments are due. Don’t just track your debt either. Track every single financial obligation. While your electric bill isn’t typically financed by taking on debt, it’s still a big part of understanding your financial situation, creating a personal budget, and of course, meeting your financial responsibilities. A bill-pay grid also helps you stay on top of everything in a proactive way. If you’re waiting for an email notification from one of your creditors, what if that goes to your spam filter? What if they usually send you a hard copy of the bill, but then you move apartments? Keeping your own log helps you create an airtight system for grabbing your debt by the horns.

Autopay is a really helpful feature too. If you’ll reliably have enough money in your checking account, automating your payments helps keep them running like clockwork.

From time to time, everyone finds themselves in a pinch financially. That’s okay. It happens. But make sure you still make your minimum payments. Otherwise, you’re in for late fees, your interest rate might increase, and you could even hurt your credit score. But you really want to try and pay more than the minimum whenever possible. That helps you pay down your debt over a shorter period of time, decreases your total interest, and improves something called your credit utilization ratio. That’s a ratio that measures how much of your credit line you’re actually using. If your credit is always maxed out, your ratio is really high, which gives the impression of financial strain and hurts your credit score. That’s why a lot of experts recommend using a relatively low percentage of your available credit line. This gives the impression that your finances are under control, helps your credit score, and earns you a better interest rate on your loans.

But a lot of people still think there’s value in creating momentum with a few early wins. The other popular method is called “The Debt Avalanche” in which you pay down the high-interest debts first. Investopedia, a prominent finance publication, says this is the most mathematically sound decision because you shorten the length of your high-interest debts, which decreases the amount you pay in interest over time. But whichever way you go, congratulations. You’re already taking financial responsibility by learning how to manage debt.

From there, the collections agency will follow up with you on behalf of your creditor, remind you about the debt, and try to collect your payment. Charge-offs definitely hurt your credit, and according to CreditCards.com, stay on your credit report for seven years. But it’s also important to know that charge-offs aren’t forgiven and you still owe the money. So, don’t give up on these debts. Rebuilding your credit is definitely a process, but people do it all the time. You can, too.

That leaves about 30% of your take-home pay up to you, whether that’s buying a plane ticket to see a friend, giving a wedding gift, or paying down debt.

But you could argue the number one rule with personal budgeting is Marcus’ “Know your numbers.” Everyone’s situation is unique. So, make sure you work towards a budget that passes your own common-sense test. Further, every time you think about taking on more debt, ask yourself if you really need to. A lot of times, the answer will be “yes.” But do you really need to finance that second water bed at a 20% rate? Maybe. But maybe not. A little restraint goes a long way in the debt department. If you have trouble formulating a budget or clarifying your financial situation, talk to a professional. They’ll probably try to talk you out of that water bed.

You can also explore something called a debt settlement program. This is when you approach your creditors through a company that helps negotiate a settlement. The settlement will typically be less than what you owe and more realistic to pay back. But if you go this route, make sure you thoroughly research the specifics of the program. For example, sometimes it’s structured where you deposit your payments in an agreed-upon account, rather than pay the creditors back directly. But this could mean that your creditors continue to tack on penalties until they actually have the money. You also might run into a few debt settlement scams, so be sure to check into these companies. The Federal Trade Commission gives a few helpful pointers when you’re vetting these opportunities. So, when it comes to debt settlement, read the fine print, then read it again.

You should be proud that you’re learning how to manage debt, but always remember that it’s nothing to be afraid of. The good kind of debt helps you build credit and wealth. Even the bad kind of debt can be managed. If you’ve let your financials slip a little bit, that’s okay. It’s like Marcus always says, “People make mistakes. I know I do. It’s how you resolve it that matters the most.”